No. 00-1831

In the Supreme Court of the United States

UNITED STATES OF AMERICA, PETITIONER

v.

SANDRA L. CRAFT

ON WRIT OF CERTIORARI TO THEUNITED STATES COURT OF APPEALS FOR

THE SIXTH CIRCUIT

BRIEF FOR THE UNITED STATES

THEODORE B. OLSONSolicitor General

Counsel of RecordEILEEN J. O’CONNOR

Assistant Attorney GeneralLAWRENCE G. WALLACE

Deputy Solicitor GeneralKENT L. JONES

Assistant to the SolicitorGeneral

DAVID ENGLISH CARMACKJOAN I. OPPENHEIMER

AttorneysDepartment of JusticeWashington, D.C. 20530-0001(202) 514-2217

(I)

QUESTION PRESENTED

Whether the federal tax lien that arises by operationof law in “all property and rights to property” of adelinquent taxpayer (26 U.S.C. 6321) attaches to therights of that taxpayer in property held in a tenancy bythe entirety.

(III)

TABLE OF CONTENTS

Page

Opinions below ............................................................................... 1Jurisdiction ...................................................................................... 1Statute involved ............................................................................. 2Statement ........................................................................................ 2Summary of argument .................................................................. 9Argument:

The federal tax lien attaches to the rights of ataxpayer in property held in a tenancy by theentirety ..................................................................................... 12

A. A spouse’s interest in a tenancy by theentirety is a valuable, legally protected interestthat is subject to the federal tax lien .......................... 12

B. The court of appeals erred in concluding thatstate law governs in determining whether aspouse’s interest in a tenancy by the entirety issubject to the federal tax lien ....................................... 16

C. The holding of the court of appeals would createirrationally disparate treatment of similarlysituated taxpayers and would facilitate fraud onthe revenue ...................................................................... 25

Conclusion ....................................................................................... 32

TABLE OF AUTHORITIES

Cases:

American Trust v. American Community Mutual Ins.Co., 142 F.3d 920 (6th Cir. 1998) ........................................ 20-21

Arango v. Third Nat’l Bank of Nashville, 992 F.2d611 (6th Cir. 1993) .................................................................. 29

BNY Fin. Corp. v. Moran, 154 Misc. 2d 435, 584N.Y.S.2d 261 (Sup. Ct. 1992) ............................................... 29

IV

Cases—Continued: Page

Bank One Ohio Trust Co. v. United States, 80 F.3d173 (6th Cir. 1996) .................................................................. 18

Beacon Milling Co. v. Larose, 138 Vt. 457, 418 A.2d32 (1980) ................................................................................... 30

Beal Bank, SSB v. Almand & Assoc., Inc., 780So.2d 45 (Fla. 2001) ................................................................ 29

Bloomfield v. Brown, 67 R.I. 452, 25 A.2d 354(1942) ........................................................................................ 28

Boggs v. Boggs, 26 Ark. App. 188, 761 S.W.2d 956(1988) ........................................................................................ 29

Ciconte v. Barba, 161 A. 925 (Del. Ch. 1932) .................... 29Cline, In re, 164 B.R. 592 (Bankr. S.D. Ohio 1994) ............ 26Cole v. Cardoza, 441 F.2d 1337 (6th Cir. 1971) ........ 4, 16, 19Colorado Nat’l Bank v. Miles, 711 P.2d 390 (Wyo.

1985) ......................................................................................... 28Commissioner v. Sunnen, 333 U.S. 591 (1948) ................ 26Cox v. Commissioner, 121 F.3d 390 (1997) ....................... 25Cuevas v. Cuevas, 191 So. 2d 843 (Miss. 1966) ................. 29DeYoung v. Mesler, 373 Mich. 499, 130 N.W.2d 38

(1964) ........................................................................................ 30Dealer Supply Co. v. Greene, 108 N.C. App. 31,

422 S.E.2d 350 (1992), review denied, 333 N.C. 343,426 S.E.2d 704 (1993) ............................................................ 28

Diss v. Agri Bus. Int’l, Inc., 670 N.E.2d 97 (Ind.Ct. App. 1996) ......................................................................... 28

Dolan v. Tigard, 512 U.S. 374 (1994) ................................. 15Dow v. State, 396 Mich. 192, 240 N.W.2d 450

(1976) ........................................................................................ 14Drye v. United States, 528 U.S. 49 (1999) ................... passimEadus v. Hunter, 249 Mich. 190, 228 N.W. 782

(1930) ........................................................................................ 14Estate of Wall, In re, 440 F.2d 215 (D.C. Cir. 1971) .......... 29Farmers’ & Merchants’ Nat’l Bank & Trust Co. v.

Globe Indem. Co., 264 Mich. 395, 249 N.W. 882(1933) ........................................................................................ 14

V

Cases—Continued: Page

Faulk v. Estate of Haskins, 714 P.2d 354 (Alaska1986) ......................................................................................... 29

Finley v. Thomas, 691 A.2d 1163 (D.C. 1997) .................. 28Geiselman v. United States, 961 F.2d 1 (1st Cir.),

cert. deneid, 506 U.S. 891 (1992) ......................................... 28-29Glass City Bank v. United States, 326 U.S. 265

(1945) .............................................................................. 11, 12, 32Hatchett v. IRS, 126 F. Supp. 2d 1038 (E.D. Mich.

2000), appeal docketed, No. 00-1645 (6th Cir. June13, 2000) ................................................................................... 31

Hallmark v. Stillings, 648 S.W.2d 230 (Mo. Ct. App.1983) ......................................................................................... 30

Hoffman v. Newell, 60 S.W.2d 607 (Ky. 1932) .................. 28Jewett v. Commissioner, 455 U.S. 305 (1982) ................... 12Kerner v. McDonald, 60 Neb. 663, 84 N.W. 92

(1900) ........................................................................................ 27Koehring v. Bowman, 194 Ind. 433, 142 N.E. 117

(1924) ........................................................................................ 30Koffman v. Smith, 453 Pa. Super. 15, 682 A.2d

1282 (1996) ............................................................................... 28Loretto v. Teleprompter Manhattan CATV Corp.,

458 U.S. 419 (1982) ................................................................ 15Lowell v. Lowell, 138 Vt. 514, 419 A.2d 321 (1980) .......... 28Madden v. Gosztonyi Sav. & Tr. Co., 331 Pa. 476,

200 A. 624 (1938) .................................................................... 30Masonry Prods., Inc. v. Tees, 280 F. Supp. 654

(D.V.I. 1968) ........................................................................... 28Mitchell v. Wilmington Trust Co., 449 A.2d 1055

(Del. Ch. 1982), aff ’d, 461 A.2d 696 (Del. Super. Ct.1983) ......................................................................................... 28

Morgan v. Commissioner, 309 U.S. 78 (1940) .................. 17Morris v. Solesbee, 8 Ark. App. 123, 892 S.W.2d 281

(1995) ........................................................................................ 28Oliver v. Givens, 204 Va. 123, 129 S.E.2d 661

(1963) ........................................................................................ 30

VI

Cases—Continued: Page

Rogers v. Rogers:136 Mich. App. 125, 356 N.W.2d 288 (1984) ...................... 14257 Va. 323, 512 S.E.2d 821 (1999) ..................................... 28

SNB Bank & Trust v. Kensey, 145 Mich. App.765, 378 N.W.2d 594 (1985) .................................................. 28

Sawada v. Endo, 57 Haw. 608, 561 P.2d 1291(1977) ........................................................................................ 28

Sills, In re, 82 F.3d 111 (5th Cir. 1996) ................................ 21Sitomer v. Orlan, 660 So.2d 1111 (Fla. Dist. Ct. App.

1995) ......................................................................................... 28Snyder, In re, 231 B.R. 437 (Bankr. D. Mass. 1999) .......... 28-29State v. One 1984 Toyota Truck:

69 Md. App. 235, 517 A.2d 103 (1986), aff ’d, 311 Md.171, 533 A.2d 659 (1987) ................................................... 29

311 Md. 171, 533 A.2d 659 (1987) ......................................... 28State v. One 1984 Toyota Truck, 69 Md. App. 235,

517 A.2d 103 (1986), aff ’d, 311 Md. 171, 533 A.2d659 (1987) ................................................................................. 29

Thor Power Tool Co. v. Commissioner, 439 U.S. 522(1979) ........................................................................................ 26

Traders Travel Int’l, Inc. v. Howser, 69 Haw. 609,753 P.2d 244 (1988) ................................................................ 29

Tyler v. United States, 281 U.S. 497 (1930) ............ 10, 23, 24United States v. Avila, 88 F.3d 229 (3d Cir. 1996) ........... 29United States v. Barbier, 896 F.2d 377 (9th Cir.

1990) ......................................................................................... 21United States v. Bess, 357 U.S. 51 (1958) ........... 13, 17, 19, 21United States v. Brynes, 848 F. Supp. 1096 (D.R.I.

1994) ......................................................................................... 29United States v. Davenport, 106 F.3d 1333 (7th Cir.

1997) ......................................................................................... 26United States v. Diemer, 859 F. Supp. 126 (D.N.J.

1994), rev’d on other grounds sub nom. UnitedStates v. Avila, 88 F.3d 229 (3d Cir. 1996) ..................... 29

United States v. Hutcherson, 188 F.2d 326 (8th Cir.1951) ......................................................................................... 25

VII

Cases—Continued: Page

United States v. Irvine, 511 U.S. 224 (1994) ................. 4, 5,7-8, 10, 22, 23

United States v. Jacobs, 306 U.S. 363 (1939) .................... 24, 27United States v. Jones, 877 F. Supp. 907 (D.N.J.

1995), aff ’d mem., 74 F.3d 1228 (3d Cir. 1995) .................. 29United States v. Kocher, 468 F.2d 503 (2d Cir.

1972), cert. denied, 411 U.S. 931 (1973) ............................. 26United States v. Mitchell, 403 U.S. 190 (1971) ................. 19, 21United States v. National Bank, 255 F.2d 504 (5th

Cir. 1958), cert. denied, 358 U.S. 825 (1958) ..................... 25United States v. National Bank of Commerce, 472

U.S. 713 (1985) .................................. 5, 9, 10, 12, 13, 16, 19, 25United States v. Overman, 424 F.2d 1142 (9th Cir.

1970) ......................................................................................... 26United States v. Ragsdale, 206 F. Supp. 613 (W.D.

Tenn. 1962) .............................................................................. 29United States v. Rodgers, 461 U.S. 677 (1983) ................. 4, 10,

18, 20, 21, 24, 25, 26United States v. Rye, 550 F.2d 682 (1st Cir.

1977) ......................................................................................... 18United States v. Sec. Trust & Sav. Bank,

340 U.S. 47 (1950) ................................................................... 12Van Der Heide, In re, 164 F.3d 1183 (8th Cir.

1999) ......................................................................................... 28Voelker, In re, 42 F.3d 1050 (7th Cir. 1994) ........................ 21Washington v. United States, 402 F.2d 3 (4th Cir.

1968), cert. denied, 402 U.S. 978 (1971) ............................. 27White v. Watson, 571 S.W.2d 493 (Tenn. Ct. App.

1978) ......................................................................................... 30Wilde v. Mounts, 95 Or. App. 522, 769 P.2d 802

(1984) ........................................................................................ 29Woodard v. Woodard, 216 Mass. 1, 102 N.E. 921

(1913) ........................................................................................ 29-30

VIII

Constitution and statutes: Page

U.S. Const.:Art. VI, Cl. 2 (Supremacy Clause) ..................................... 20Amend. XIV (Due Process Clause) .................................... 14

Internal Revenue Code (26 U.S.C.):§ 2040(b) ................................................................................. 23§ 6013(d)(3) ............................................................................ 30§ 6321 ............................................................. 2, 9, 12, 13, 16, 17§ 6334(a) ................................................................................. 20, 21§ 6334(a)(13) .......................................................................... 21§ 6334(c) ................................................................................. 21§ 6334(e) ................................................................................. 21§ 7403 ...................................................................................... 15, 20§ 7403(c) ................................................................................. 15

Revenue Act of 1916, ch. 463, § 202(c), 39 Stat. 778 .......... 23Alaska Stat. § 09.38.100(a) (Michie 2001) ............................. 28735 Ill. Comp. Stat. Ann. 5/12-112 (West 1993 & Supp.

2000) ......................................................................................... 26, 28Ky. Rev. Stat. Ann. § 140.050 (Michie 1991) ........................ 29Mich. Comp. Laws Ann. (West):

§ 552.102 (West 1988 & Supp. 2001) ................................... 14§ 554.872(g) (Supp. 1997) .................................................. 13, 14§ 554.872(i) (Supp. 1997) ....................................................... 13§ 557.71 (1988) ......................................................................... 14§ 700.2901(g) (Supp. 2001) .................................................... 13, 14§ 700.2901(i) (Supp. 2001) ..................................................... 13

Ohio Rev. Code Ann. §§ 5302.17-5302.21 (Anderson1989 & Supp. 2000) ................................................................ 26

Okla. Stat. Ann. tit. 60, § 74 (West 1994) .............................. 29, 30Vt. Stat. Ann. tit. 15:

§ 1202(2) ................................................................................... 30§ 1204(e)(1) .............................................................................. 30

Miscellaneous:

4 B. Bittker, Federal Taxation of Income, Estatesand Gifts (1989) ...................................................................... 13

Black’s Law Dictionary (rev. 4th ed. 1968) ....................... 13

IX

Miscellaneous—Continued: Page

Comment, Federal Tax Liens and State HomesteadExemptions: The Aftermath of United States v.Rodgers, 34 Buff. L. Rev. 297 (1985) ................................. 25

Comment, United States v. National Bank of Commerce:Co-Owners Suffer the “Federal Law Consequences”,11 Del. J. Corp. L. 561 (1986) ............................................... 25

H.R. Rep. No. 708, 72d Cong., 1st Sess. (1932) ................... 12R. Heaton, Administration of Entireties Property in

Bankruptcy, 60 Ind. L.J. 305 (1985) .................................. 26S. Johnson, After Drye: The Likely Attachment of

the Federal Tax Lien to Tenancy-by-the-EntiretiesInterests, 75 Ind. L.J. 1163 (2000) ....................................... 25

S. Johnson, Fog, Fairness, and the Federal Fisc:Tenancy-by-the-Entireties Interests and the FederalTax Lien, 60 Mo. L. Rev. 839 (1995) ........................ 25, 27, 32

Note, Property Subject to the Federal Tax Lien,77 Harv. L. Rev. 1485 (1964) ............................................... 19, 32

S. Rep. No. 665, 72d Cong., 1st Sess. Pt. 1 (1932) ............... 12W. Plumb, Federal Tax Liens (3d ed. 1972) .............. 16, 21, 30

(1)

In the Supreme Court of the United States

No. 00-1831

UNITED STATES OF AMERICA, PETITIONER

v.

SANDRA L. CRAFT

ON WRIT OF CERTIORARI TO THEUNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

BRIEF FOR THE UNITED STATES

OPINIONS BELOW

The opinions of the court of appeals (Pet. App. 1a-41a, 44a-69a) are reported at 140 F.3d 638 and 233 F.3d358. The opinions of the district court (Pet. App. 70a-93a, 95a-104a) are reported at 74 A.F.T.R.2d (RIA)6362, 76 A.F.T.R.2d (RIA) 7447, and 65 F. Supp. 2d 651.

JURISDICTION

The judgment of the court of appeals was entered onNovember 22, 2000. Pet. App. 42a. The petition forrehearing was denied on March 16, 2001. Pet. App. 43a.The petition for a writ of certiorari was filed on June 8,2001, and was granted on September 25, 2001. Thejurisdiction of this Court rests upon 28 U.S.C. 1254(1).

2

STATUTE INVOLVED

Section 6321 of the Internal Revenue Code, 26 U.S.C.6321 provides:

If any person liable to pay any tax neglects orrefuses to pay the same after demand, the amount(including any interest, additional amount, additionto tax, or assessable penalty, together with anycosts that may accrue in addition thereto) shall be alien in favor of the United States upon all propertyand rights to property, whether real or personal,belonging to such person.

STATEMENT

1. a. Although Don Craft earned substantial incomefrom his law practice during the years 1979 through1986, he failed to file federal income tax returns foreach of those years. Pet. App. 45a, 72a. In 1988, theInternal Revenue Service assessed $482,446 in unpaidincome tax liabilities owed by him for those years anddemanded payment. Id. at 45a. When Mr. Craft failedto pay these taxes on demand, the federal tax lienattached by operation of law to “all property and rightsto property” in which he owned any interest. 26 U.S.C.6321. Notice of the federal tax lien was filed on March30, 1989, in the county of his residence. Pet. App. 45a.

b. Sandra L. Craft was the wife of Don Craft and isthe respondent in this case. In 1972, Don and SandraCraft purchased real property in Grand Rapids, Michi-gan, as tenants by the entirety. Pet. App. 45a. OnAugust 28, 1989, after the notice of tax lien had beenfiled for the taxes owed by Don Craft, the Crafts jointlyexecuted a quitclaim deed that purported to transferthis property solely to Sandra Craft for one dollar. Id.at 45a. When she thereafter attempted to sell the

3

property in 1992, a title search revealed the govern-ment’s lien. The Internal Revenue Service agreed torelease the tax lien from this property so that the salecould be made, with the stipulation that half of the netproceeds—amounting to $59,944.10–-were to be held inescrow pending a final determination of the rights ofthe parties.1

2. Sandra Craft then brought this action to quiettitle to the escrowed proceeds. The government as-serted in its answer (i) that the federal tax lien attachedto Don Craft’s interest in the property when it was heldby the Crafts as tenants by the entirety, (ii) that whenthe property was conveyed to respondent it remainedsubject to the government’s lien and (iii) that thegovernment is therefore entitled to one-half of the saleproceeds. The government further asserted that Donand Sandra Craft’s purported conveyance of the prop-erty to Sandra Craft was invalid as a fraud on creditors.Pet. App. 46a-47a.

The district court granted the government’s motionfor summary judgment. The court held (i) that theconveyance of the property to respondent terminatedthe tenancy by the entirety, (ii) that, at that moment,each spouse took an equal one-half interest in the estateand (iii) that the government’s lien attached to DonCraft’s one-half interest in the estate at that time andremained attached to the property throughout anysubsequent transfers. Pet. App. 104a. The court con-

1 Under the escrow agreement, the funds representing DonCraft’s 50% share of the sale proceeds are held “in an interest-bearing account * * * until such time as a resolution of the taxlien dispute is reached and an agreement is signed by both theInternal Revenue Service and representatives of Don Craft oruntil ordered to release those funds by an appropriate courtorder.” J.A. 30.

4

cluded, however, that the tax lien attached only to thevalue of Don Craft’s interest as of the date of theCrafts’ conveyance of the property to respondent andnot to any appreciation of that property’s value thatoccurred subsequent to that date. Id. at 46a-48a, 104a.

3. a. Both parties appealed. Pet. App. 44a. On re-spondent’s appeal, the Sixth Circuit reversed thedetermination of the district court that the tax lienattached to the property.2 Relying on that circuit’searlier decision in Cole v. Cardoza, 441 F.2d 1337(1971), the panel majority held that Don Craft neverhad an attachable interest in the property held in atenancy by the entirety—either prior to, or at the tran-sitory moment of, the conveyance to respondent. Pet.App. 54a-56a. In reaching that conclusion, the majorityrelied on the common-law fiction, adopted in Michigan,that property held in a tenancy by the entirety is notowned by either of the spouses but is instead owned bythe “marital unit.” The court concluded that thehusband (who owed the taxes) had no separate interestin entirety property to which the tax lien could attach.Ibid. Since Michigan law exempts property held in atenancy by the entirety from seizure by creditors forthe debts of only one spouse, the majority concludedthat this property was exempt from the federal tax lienfor the separate tax debt of one spouse. Id. at 57a-58a.

According to the panel majority, the decisions of thisCourt in United States v. Irvine, 511 U.S. 224 (1994),and United States v. Rodgers, 461 U.S. 677 (1983), haveno effect “on the government’s ability to attach a lien to

2 As a result of that ruling, the court of appeals did not consider

the government’s appeal of the district court’s determination thatthe tax liens did not attach to any appreciation occurring after theCrafts’ conveyance of the property to respondent.

5

an entireties estate, because these cases do not alterthe basic tenet that state law governs the issue ofwhether any property interests exist in the first place.”Pet. App. 55a. The court remanded the case for con-sideration of the fraudulent conveyance issue that hadnot been addressed by the district court. Id. at 58a.

b. Judge Ryan concurred in the remand but dis-sented from the majority’s conclusion that a spouse’sinterest in entirety property is not “property or rightsto property” to which the federal tax lien may attach.Pet. App. 69a. He concluded that each spouse hasvaluable, legally-protected rights in property held in atenancy by the entirety to which the tax lien attachesas a matter of federal law: in particular, each spousehas the right to share in the proceeds of any sale orlease of the property and the right to the entireproperty if the other spouse predeceases him. Id. at61a. Judge Ryan added that this Court’s decisions inUnited States v. National Bank of Commerce, 472 U.S.713 (1985), and United States v. Irvine, supra, make itclear that the state legal fiction that the husband andwife are a single entity—and the associated fiction thatneither has any separate interest in entirety property—cannot be interposed to preclude the operation of thefederal lien (Pet. App. 63a-64a):

As the Supreme Court has made clear, such state-law fictions, while they are perhaps valid defensesagainst state-law creditors, have no effect on an IRSlien. For example, in National Bank of Commerce,the fact that no Arkansas creditor could reach fundsof a taxpayer-debtor that were held in a jointaccount with other nondebtor individuals did notprevent the IRS from attaching the entire account.* * *

6

Although the majority disagrees, I am satisfiedthat United States v. Irvine, 511 U.S. 224 (1994),also undermines Sandra Craft’s position. In Irvine,the Court reiterated that legal fictions—althoughvalid protection from creditors under state law—could not be used to avoid federal tax liabilities.

Judge Ryan noted, moreover, that the majority opinion“not only contravenes established precedent,” it also“provides an avenue for easy avoidance of federalincome-tax laws.” Id. at 69a.3

4. On remand, the district court concluded thatwhen, as here, property is made exempt from theclaims of creditors under state law, a conveyance of thatproperty cannot be a fraudulent transfer under statelaw. Pet. App. 79a-85a. The court stated, however,that this rule is inapplicable when the debtor, whileinsolvent, places non-exempt funds beyond the reach ofhis creditors by using them to enhance exempt prop-erty. Id. at 85a-86a. Since Don Craft had enhanced thevalue of the property by making mortgage paymentswhile he was insolvent, the court held that thegovernment is entitled to a lien on his share of the saleproceeds to the extent of the enhanced value—whichthe court concluded was $6693. Id. at 86a, 92a.4

3 Judge Ryan was of the view that the federal tax lien would

not follow the property after its transfer to respondent unless thattransfer was set aside as fraudulent. See Pet. App. 69a. Heconcurred in the remand solely for the purpose of determiningwhether Don and Sandra Craft’s transfer of the property for $1 toSandra Craft as sole owner constituted a fraud on creditors. Id. at68a-69a.

4 This figure included only the portion of the mortgage pay-ments that had been applied to reduce the principal balance of theloan. The district court rejected the government’s additional claimto recover the far greater interest payments, as well as local ad

7

5. Both parties again appealed. Pet. App. 1a-2a.The government also petitioned the court of appeals forhearing en banc on the ground that the decision in CraftI conflicted with the relevant decisions of this Court.The court of appeals denied that petition in December1999. Pet. App. 6a.

a. The panel to which the appeal was assigned con-cluded that it was bound by the prior decision in Craft Iand dismissed the government’s appeal.5 Pet. App. 2a.The panel stated that it was bound by Craft I becausethe relevant Supreme Court decisions do not “directlyh[o]ld otherwise” (id. at 11a) and because the recentdecision of this Court in Drye v. United States, 528 U.S.49 (1999), which was issued after Craft I was decided,“has not so fundamentally changed the legal landscapeas to overrule Craft I.” Pet. App. 18a.

b. In a concurring opinion, Judge Gilman agreed thatthe panel was bound by Craft I but concluded “that theresult reached in Craft I and that this court endorsestoday, is inconsistent with Supreme Court precedentand should be reversed.” Pet. App. 35a. Judge Gilmantherefore recommended “that this case be revisited enbanc.” Ibid.

Judge Gilman stated that the decision in Craft I wasinconsistent with the decisions of this Court that makeclear that the federal tax laws are “not struck blind” bystate-law legal fictions. Pet. App. 36a (quoting United valorem property tax payments, that Don Craft made over theyears with the untaxed income that generated the tax liability inthe first place. Pet. App. 92a-93a.

5 On respondent’s appeal, the panel affirmed the district court’sruling that the government is entitled to a lien on the property tothe extent of taxpayer’s payments of the principal of the out-standing mortgage loan made after the taxes began to accrue. Pet.App. 20a-23a.

8

States v. Irvine, 511 U.S. at 240). Judge Gilman statedthat (Pet. App. 38a):

[i]n contravention of Irvine, the majority in Craft Ifailed to look past Michigan’s characterization of anindividual’s interest in entireties property andignored the substantial rights actually held by DonCraft, which similarly had undeniable value. Inother words, I believe that the majority in Craft Iwas “struck blind” by Michigan’s “legal fictions.”

Judge Gilman noted that each spouse has severalvaluable, legally-protected rights in entirety propertyto which the federal tax lien may attach: (i) the right toenter and enjoy the property and to exclude all others;(ii) the right to half of any rental or sale proceeds; (iii) acontingent right of survivorship; and (iv) in the event ofdivorce, the right to bring an action for partition andsale. Pet. App. 37a-38a. Because these valuable rightsare protected under state law, “Craft I reached thewrong result, and the IRS ought to have had the rightto attach Don Craft’s valuable interest in the tenancyby the entirety.” Id. at 38a. Although Judge Gilmanbelieved the panel was bound by Craft I, he recom-mended that the case be reheard en banc because“Craft I contravenes recent Supreme Court decisions.”Id. at 41a.

c. Following the entry of the panel decision, the gov-ernment filed a petition for rehearing en banc. Thatpetition was denied when “less than a majority of thejudges” of that circuit voted to grant it. Pet. App. 43a.

9

SUMMARY OF ARGUMENT

1. Under Section 6321 of the Internal RevenueCode, the federal tax lien attaches by operation of lawto “all property and rights to property” of a delinquenttaxpayer. 26 U.S.C. 6321. This statutory lien is broadin scope and “reveals on its face that Congress meant toreach every interest in property that a taxpayer mighthave.” United States v. National Bank of Commerce,472 U.S. 713, 720 (1985). As this Court recently con-cluded, this expansive federal tax lien “reach[es] everyspecies of right or interest protected by law and havingan exchangeable value.” Drye v. United States, 528U.S. 49, 56 (1999).

The interest of a married taxpayer in property heldin a tenancy by the entirety is a valuable, legally pro-tected “species of right or interest” that is encompassedwithin the federal tax lien. Each spouse has the rightto use the property, to receive half the proceeds of thesale of the property, or to receive the property in feesimple absolute on the death of the other spouse.Because these legally-protected rights have “undeni-able value” (Pet. App. 38a (Gilman, J.)), they constitute“property” or “rights to property” within the broadscope of the federal tax lien. Drye v. United States, 528U.S. at 56.

2. a. The court of appeals erred in concluding that“state law governs the issue of whether any propertyinterests exist in the first place” (Pet. App. 55a). It isfederal law, not state law, that “determine[s] whetherthe taxpayer’s state-delineated rights qualify as ‘prop-erty’ or ‘rights to property’ within the compass of thefederal tax lien legislation.” Drye v. United States, 528U.S. at 58. “Once it has been determined that state lawcreates sufficient interests in the taxpayer to satisfy

10

the requirements of the statute, state law is inopera-tive, and the tax consequences thenceforth are dictatedby federal law.” United States v. National Bank ofCommerce, 472 U.S. 713, 722 (1985).

b. Under the established federal standard, the valu-able, legally-protected rights of each spouse in entiretyproperty constitutes an interest in “property” or“rights to property” to which the federal lien attaches.The fact that state law may, in some circumstances,preclude other creditors from seizing or foreclosing onproperty held in a tenancy by the entirety does notprevent the attachment and enforcement of the federaltax lien. As this Court emphasized in United States v.Rodgers, 461 U.S. 677, 701 (1983), “state-created ex-emptions against forced sale” of jointly-owned propertyare ineffective against the federal tax lien. It is“irrelevant” to the enforcement of the federal tax lienthat state law prohibits other creditors from foreclosingon property held in a tenancy by the entirety. UnitedStates v. National Bank of Commerce, 472 U.S. at 727.

c. The court of appeals erred in relying on the legalfiction employed in Michigan that entirety property isowned by the marital unit rather than by the individualspouses acting collectively. Federal tax statutes arenot “struck blind” by state legal fictions concerningproperty ownership. Drye v. United States, 528 U.S. at59; United States v. Irvine, 511 U.S. 224, 240 (1994). Inparticular, in applying federal tax statutes affectingtenancies by the entirety, courts are to look to the“actual” substantive rights of the spouses rather thanto the “amiable fiction” of state law that such propertyis owned by the “marital unit” rather than by thespouses collectively. Tyler v. United States, 281 U.S.497, 503 (1930).

11

3. The contrary holding of the court of appeals wouldcause an irrationally disparate treatment of similarlysituated taxpayers. A tenancy by the entirety is theonly form of joint property ownership that has beentreated as exempt from the federal tax lien for thedebts of one spouse. Other types of joint ownership—such as homestead property, community property, andjointly-owned property—have consistently been heldsubject to the federal tax lien. The decision of the courtof appeals would create an unwarranted preference fortaxpayers who own property in a tenancy by theentirety over taxpayers who jointly own property inthe many States that do not recognize, or haveabolished, that form of ownership.

The decision of the court of appeals also fails the testof common sense, for it “provides an avenue for easyavoidance of federal income-tax laws.” Pet. App. 69a(Ryan, J.). Under the court’s reasoning, both spousesmay earn income, refuse to file returns or file onlyseparate returns, and avoid paying taxes simply byshielding their residence—and, in many States, eventheir bank accounts and other financial assets—in atenancy by the entirety. It is implausible to concludethat, in crafting the broad text of the federal tax lienstatute for the very purpose of “assur[ing] the collec-tion of taxes” (Glass City Bank v. United States, 326U.S. 265, 267 (1945)), Congress intended to authorizesuch an obvious and facile method for evading andobstructing tax collection.

12

ARGUMENT

THE FEDERAL TAX LIEN ATTACHES TO THE

RIGHTS OF A TAXPAYER IN PROPERTY HELD

IN A TENANCY BY THE ENTIRETY

A. A Spouse’s Interest In A Tenancy By The En-

tirety Is A Valuable, Legally Protected Interest

That Is Subject To The Federal Tax Lien

1. When a taxpayer fails to pay taxes after a demandfor payment has been made, a lien arises by operationof law “in favor of the United States upon all propertyand rights to property” of that taxpayer. 26 U.S.C.6321. “[T]he purpose of the federal tax lien [is] toinsure prompt and certain collection of taxes due theUnited States from tax delinquents.” United States v.Security Trust & Sav. Bank, 340 U.S. 47, 51 (1950). Toachieve that goal, Congress employed the broadestterminology “to reach every interest in property that ataxpayer might have.” United States v. National Bankof Commerce, 472 U.S. 713, 720 (1985). Indeed,“[s]tronger language could hardly have been selected toreveal a purpose to assure the collection of taxes.”Glass City Bank v. United States, 326 U.S. 265, 267(1945). Recognizing the sweeping text and purpose ofSection 6321, this Court has recently held that thisbroad federal tax lien “reach[es] every species of rightor interest protected by law and having an exchange-able value.” Drye v. United States, 528 U.S. 49, 56(1999). See also Jewett v. Commissioner, 455 U.S. 305,309 (1982) (quoting S. Rep. No. 665, 72d Cong., 1st Sess.Pt. 1, at 39 (1932); H.R. Rep. No. 708, 72d Cong., 1stSess. 27 (1932)).

The term “property” is “commonly used to denoteeverything which is the subject of ownership, corporealor incorporeal, tangible or intangible, visible or invisi-

13

ble, real or personal; everything that has an exchange-able value or which goes to make up wealth or estate.It extends to every species of valuable right or interest* * *.” Black’s Law Dictionary 1382 (rev. 4th ed.1968). The “property” or “rights to property” to whichthe federal tax lien attaches thus includes interests asdiverse as “unliquidated choses in action, contingentremainders, options, alimony, the taxpayer’s interest injointly owned property, business licenses, the cashsurrender value of life insurance, and property exemptunder state law.” 4 B. Bittker, Federal Taxation of In-come, Estates and Gifts ¶ 111.6.4, at 111-158 (1989). Seealso Drye v. United States, 528 U.S. at 61 (an heir’sright to inherit is “property” under Section 6321);United States v. National Bank of Commerce, 472 U.S.at 723-727 (a depositor’s right to withdraw the entirecontents of a joint bank account qualifies as “property”under Section 6321); United States v. Bess, 357 U.S. at56-57 (an insured’s right under a life insurance policy tocompel his insurer to pay him the cash surrender valueis “property” subject to the tax lien).

2. No less than an heir’s right to inherit, the interestof a married taxpayer in a tenancy by the entirety is avaluable, legally protected “species of right or interest”(Drye v. United States, 528 U.S. at 56) and is thereforeencompassed within the federal tax lien. During theperiod of a tenancy by the entirety, each spouse hasseparate rights in the present use of the property andin its disposition upon the termination of the tenancy bysale, death or divorce. For example, in Michigan, “jointproperty”—a category that includes a tenancy by theentirety in real or personal property —“consist[s] of apresent interest and a future interest.” Mich. Comp.Laws Ann. § 554.872(g), (i) (West Supp. 1997),recodified at id. § 700.2901(g), (i) (West Supp. 2001).

14

The “present interest” entitles each spouse to reside onthe property, to exclude third parties from the prop-erty, to share in the profits of the property, to join orrefuse to join in the mortgage, lease, or sale of theproperty and, upon the sale, individually to receive halfthe proceeds. Id. § 557.71 (West 1988); see Rogers v.Rogers, 136 Mich. App. 125, 135, 356 N.W.2d 288, 293(1984); Farmers’ & Merchants’ Nat’l Bank & Trust Co.v. Globe Indem. Co., 264 Mich. 395, 399, 249 N.W. 882,883 (1933); Eadus v. Hunter, 249 Mich. 190, 193-196, 228N.W. 782, 783-784 (1930). In addition, if a marriedcouple divorces, each spouse becomes a tenant incommon of realty formerly owned by the entirety,unless the divorce decree provides otherwise. Mich.Comp. Laws Ann. § 552.102 (West 1998 & Supp. 2001).The “future interest” in a tenancy by the entirety “isthe right of survivorship,” which is the right to receivethe property in fee simple absolute upon the death ofthe other spouse. Id. § 554.872(g) (West Supp. 1997),recodified at id. § 700.2901(g) (West Supp. 2001). Thesevaluable interests are expressly described as “prop-erty” rights under state law (id. § 700.2901(i)), and theMichigan Supreme Court has held that each spouseholding an interest in a tenancy by the entirety has “asignificant interest in property” that is protected by theDue Process Clause of the United States Constitution.Dow v. State, 396 Mich. 192, 204, 240 N.W.2d 450, 456(Mich. 1976).

These valuable rights of each spouse in a tenancy bythe entirety qualify as “property” or “rights to prop-erty” under the broad text of the tax lien statute.6 The

6 The imposition of a federal tax lien on entirety property does

not, by itself, divest the “marital estate” from possession. Theprimary effect of a lien is to ensure that such property remains

15

right of each spouse “to exclude others” from propertyheld in a tenancy by the entirety is “one of the mostessential sticks in the bundle of rights that are com-monly characterized as property.” Dolan v. Tigard, 512U.S. 374, 384 (1994). Similarly, each spouse’s right to“possess, use and dispose” of the property, in concertwith the other, is a characteristic attribute of a “prop-erty” right. Loretto v. Teleprompter Manhattan CATVCorp., 458 U.S. 419, 435 (1982). And, each spouse hasthe right to receive half of the proceeds of a sale or toreceive the fee simple absolute upon the death of theother. These legally-protected rights have undeniablevalue and therefore constitute “property or rights toproperty within the broad scope of the federal tax lien.Drye v. United States, 528 U.S. at 56.7

potentially available for payment of delinquent taxes and cannot betransferred free of the government’s claim in the interim.Moreover, as this Court emphasized in United States v. Rodgers,461 U.S. at 696, the government’s lien reaches only the taxpayer’sinterest in property. If the government seeks to sell the propertyto enforce its lien under 26 U.S.C. 7403, the court may denyforeclosure in “the exercise of reasoned discretion.” 461 U.S. at706. And, if a sale is authorized, the non-liable spouse must becompensated for her interest “according to the findings of thecourt in respect to the interests of the parties and of the UnitedStates.” Id. at 697-698 (quoting 26 U.S.C. 7403(c)).

7 The valuable, legally-protected rights of a taxpayer inentirety property are at least as extensive as the right of an heir-at-law to inherit under Arkansas law—a right to which the federaltax lien attached under this Court’s decision in Drye v. UnitedStates, 528 U.S. at 59-60.

16

B. The Court Of Appeals Erred In Concluding That

State Law Governs In Determining Whether A

Spouse’s Interest In A Tenancy By The Entirety

Is Subject To The Federal Tax Lien

The court of appeals erred by relying (Pet. App. 51a-53a) on its decision in in Cole v. Cardoza, 441 F.2d 1337(1971), and in failing to follow the recent, clear guidanceof this Court in Drye v. United States, supra.

1. The rationale of Cole v. Cardoza, 441 F.2d at 1343,is that state law “governs the property rights of thetaxpayers” and that courts must therefore “look to thelaw of ” the State in determining whether “the federaltax lien attach[es] to the * * * property.” The courtconcluded that, since “tenants by the entirety holdunder a single title” under Michigan law, the federal taxlien cannot attach to the property for the debts of onespouse only. Ibid. In the present case, the court ofappeals repeated the reasoning of Cole by relying onwhat it described as “the basic tenet that state lawgoverns the issue * * * whether any propertyinterests exist in the first place.” Pet. App. 55a.

That reasoning is demonstrably incorrect, however,for this Court has made it clear that “[i]t is not materialthat the economic benefit to which the [taxpayer’s]right pertains is not characterized as ‘property’ by locallaw.” Drye v. United States, 528 U.S. at 58 n.5 (quotingW. Plumb, Federal Tax Liens 27 (3d ed. 1972)). ThisCourt has instead explained that, while state law deter-mines the nature of a taxpayer’s interest in property,federal law determines whether that interest is suffi-cient to constitute “property” or “rights to property”under 26 U.S.C. 6321. As the Court stated in UnitedStates v. National Bank of Commerce, 472 U.S. at 722(internal quotations omitted):

17

[o]nce it has been determined that state law createssufficient interests in the taxpayer to satisfy therequirements of the statute, state law is inoperative,and the tax consequences thenceforth are dictatedby federal law.

Courts are therefore to “look * * * to federal law todetermine whether the taxpayer’s state-delineatedrights qualify as ‘property’ or ‘rights to property’within the compass of the federal tax lien legislation.”Drye v. United States, 528 U.S. at 58. See also UnitedStates v. Bess, 357 U.S. 51, 56-57 (1958); Morgan v.Commissioner, 309 U.S. 78, 80 (1940). And, applyingthis federal standard, this Court has clearly and con-cisely held that the tax lien attaches to “every speciesof right or interest protected by law and having anexchangeable value.” Drye v. United States, 528 U.S. at56. The valuable, legally protected rights possessed byeach spouse in a tenancy by the entirety constitute“property or rights to property” to which the lienapplies under this expansive federal standard. Seepages 13-15, supra.

2. The court of appeals ultimately appeared toacknowledge in the present case that each spousepossesses valuable rights in a tenancy by the entiretythat are protected under state law. The court reasoned,however, that the federal tax lien does not attach tothose interests in property—such as the right ofsurvivorship—because the rights of each spouse are nottreated as “separate” or “severable” under state law.Pet. App. 57a-58a.

That reasoning conflicts with the plain text of the taxlien statute and with the clear holdings of this Court.The federal tax lien attaches to “all property and rightsto property” (26 U.S.C. 6321 (emphasis added)), not

18

merely to property that is immediately transferable bythe owner of the interest to a third party. For example,United States v. Rodgers, 461 U.S. 677, 684-685 (1983),concerned a married taxpayer who held an interest inhomestead property that could not be mortgaged, soldor abandoned without the consent of the other spouseunder state law. The Court expressly held that theinability of the taxpayer in Rogers to exercise his rightsseparately from the rights of his spouse was not a basisfor denying foreclosure of the federal tax lien. Id. at702. The Court concluded that the federal tax lienreaches the taxpayer’s interest in “the entire property”and that, in the event that a judicial foreclosure of thatlien occurs, the separate rights of the non-liable spouse“are adequately discharged by the payment of compen-sation.” Id. at 701, 702. See note 6, supra. Courts havetherefore consistently held that the federal tax lien on“all property and rights to property” of a delinquenttaxpayer attaches not only to presently transferablerights but also to those valuable and legally-protectedinterests that the taxpayer would not, acting by him-self, be able immediately to transfer or sell. See, e.g.,Bank One Ohio Trust Co. v. United States, 80 F.3d 173,176 (6th Cir. 1996) (federal tax lien attaches to theinterest of the beneficiary of a spendthrift trust) (citedin Drye v. United States, 528 U.S. at 58 n.5 & 60 n.7);United States v. Rye, 550 F.2d 682, 684-685 (1st Cir.1977) (federal tax lien attaches to taxpayer’s nonassig-nable right to receive support payments). The court ofappeals thus erred in concluding in this case that thefederal tax lien cannot attach to “property” or “rightsto property” until those rights are “severable” from therights of others in the same property.

3. The court of appeals improperly ignored theprecedents of this Court in relying on the fact that

19

Michigan does not authorize the seizure of tenancy bythe entirety property for the debts of only one spouse.Pet. App. 52a (citing Cole v. Cardoza, 441 F.2d at 1343).This Court has frequently held that state-law restric-tions on seizure and exemptions from foreclosure do notprevent the attachment and enforcement of the federaltax lien. See Drye v. United States, 528 U.S. at 59(quoting United States v. Mitchell, 403 U.S. 190, 204(1971) (“exempt status under state law does not bindthe federal collector”)); Note, Property Subject to theFederal Tax Lien, 77 Harv. L. Rev. 1485, 1498 (1964)(stripped of its fiction that husband and wife are a legalunit, the entirety theory “serves much the same func-tion as an exemption created by state law” and thusshould not “defeat the federal lien”). As this Courtexplained in detail in United States v. National Bank ofCommerce, 472 U.S. at 727 (citation omitted):

The question whether a state-law right constitutes“property” or “rights to property” is a matter offederal law. * * * [T]he facts that under [state]law [the taxpayer’s] creditors * * * could not[seize or attach the property] are irrelevant. Thefederal statute relates to the taxpayer’s rights toproperty and not to his creditors’ rights. The Courtof Appeals would remit the IRS to the rights only anordinary creditor would have under state law. Thatresult “compare[s] the government to a class ofcreditors to which it is superior.”

See also United States v. Bess, 357 U.S. at 57 (“[o]nce ithas been determined that state law creates sufficientinterests in the insured to satisfy requirements of [thestatute], state law is inoperative to prevent the attach-ment of liens created by federal statutes in favor of theUnited States”).

20

For example, in United States v. Rodgers, 461 U.S. at701, this Court expressly held that “state-created ex-emptions against forced sale” of jointly-owned propertyare ineffective against the federal lien. The tax lieninvolved in Rodgers, like the lien involved here, arosefrom the tax liability of only one spouse and attached tothat spouse’s interest in the jointly-owned familyresidence. The government sought to foreclose on itslien in Rodgers by obtaining a judicial sale of theproperty and compensating the non-liable spouse forher separate interest. Although Texas law protectedhomestead property from forced sale for the payment ofdebts (461 U.S. at 684), this Court held that the federaltax lien could be foreclosed on the homestead for theunpaid taxes of one spouse. See note 6, supra. TheCourt reasoned that the Supremacy Clause of the Con-stitution “provides the underpinning for the FederalGovernment’s right to sweep aside state-created ex-emptions” (id. at 701) and “allows the federal tax collec-tor to convert a non-delinquent spouse’s homesteadestate into its fair cash value.” Id. at 703-704.

As this Court pointed out in Drye v. United States,528 U.S. at 56-57, the fact that state-law exemptions ofproperty from seizure by creditors are ineffectiveagainst the federal tax lien is corroborated by Section6334(a) of the Code, 26 U.S. 6334(a). That statute liststhirteen specific categories of property that are exemptfrom administrative levy—such as wearing apparel,tools of a trade, employment benefits, and workmen’scompensation. Ibid.8 The categories of property listed

8 The categories of property that are exempt from levy under

26 U.S.C. 6334(a) are not exempt from judicial sale under 26 U.S.C.7403 and have been held not to be exempt from the federal tax lien.See American Trust v. American Community Mutual Ins. Co.,

21

as exempt from federal levy in Section 6334(a) are ex-clusive, for the statute specifies that, “[n]otwithstand-ing any other law of the United States * * *, noproperty or rights to property shall be exempt fromlevy other than the property specifically made exemptby subsection (a).” 26 U.S.C. 6334(c). Property held intenancy by the entirety is not among the types ofproperty that are listed as exemptions in this federalstatute.9 See 26 U.S.C. 6334(a). As this Court empha-sized in Drye, “[t]he fact that * * * Congress providedspecific exemptions from distraint is evidence that Con-gress did not intend to recognize further exemptionswhich would prevent attachment of [federal tax] liens* * * .” 528 U.S. at 56 (quoting United States v. Bess,357 U.S. at 57). “Th[e] language [of Section 6334] isspecific and it is clear and there is no room in it forautomatic exemption of property that happens to beexempt from state levy under state law.” United Statesv. Mitchell, 403 U.S. 190, 205 (1971) (quoted at Drye v.United States, 528 U.S. at 56-57); W. Plumb, supra, at20.

142 F.3d 920, 925 (6th Cir. 1998); In re Sills, 82 F.3d 111, 113 (5thCir. 1996); In re Voelker, 42 F.3d 1050, 1052 (7th Cir. 1994); UnitedStates v. Barbier, 896 F.2d 377, 389 (9th Cir. 1990). The lien onsuch property could thus be enforced through a judicial foreclosureor upon a voluntary sale.

9 Even though property held in a tenancy by the entirety orany other form of joint ownership is subject to the federal tax lien,the government cannot administratively levy upon any principalresidence—regardless of the form of ownership—without the priorapproval of a federal district court judge or magistrate. 26 U.S.C.6334(a)(13) & (e). Moreover, unlike a judicial foreclosure (see note6, supra), the government can administratively seize and sell onlythe taxpayer’s interest in jointly held property. See United Statesv. Rodgers, 461 U.S. at 695-696.

22

4. The court of appeals also erred in relying on thelegal fiction employed in Michigan that property held ina tenancy by the entirety is owned by the marital unit,rather than by the individual spouses acting collec-tively. Pet. App. 51a-53a. The court reasoned that theconsequence of this legal fiction is that neither spousehas an interest in “property” or a “right to property” towhich the federal tax lien could attach. Ibid.

This Court has repeatedly emphasized that federaltax law is not “struck blind” by state legal fictionsconcerning property ownership. Drye v. United States,528 U.S. at 59; United States v. Irvine, 511 U.S. 224, 240(1994). In Drye, the Court applied that principle inholding that the federal tax lien attached to the interestof an heir who disclaimed his rights in an intestateestate even though state law deemed any such dis-claimer to have occurred before the death of the dece-dent so that creditors would be unable to attach thedisclaimant’s interest in the estate. The Court heldthat application of the federal tax lien statute is notcontrolled by the legal fictions of state law and that theright of the heir to inherit is “a valuable, transferable,legally protected right” to which the federal tax lienattached before the disclaimer was made. 528 U.S. at59, 60.

In United States v. Irvine, 511 U.S. at 239-240, thisCourt likewise refused to be “struck blind” by the“legal fiction” created by state law that a valid state-law disclaimer of an interest in a trust had the effect ofcanceling the transfer of that interest to the disclaimantab initio. The Court explained that “Congress had notmeant to incorporate state-law fictions as touchstonesof taxability” and that the fictional construct of statelaw did not destroy the reality that the disclaimantpossessed—even if only transitorily—a “property” in-

23

terest in the trust for purposes of federal tax law. Id. at240.10

Indeed, in Tyler v. United States, 281 U.S. 497 (1930),this Court specifically rejected the proposition thatfederal tax law is governed by the state law fiction thatentirety property is owned by the “marital unit” ratherthan by the spouses acting collectively. That caseconcerned the constitutionality of the Revenue Act of1916, ch. 463, § 202(c), 39 Stat. 778, which taxed thetotal value of entirety property—both the share attrib-utable to the decedent and to the surviving spouse—inthe estate of the first spouse to die.11 The estateadministrators contended that the entirety propertywas owned by the marital unit under state law and that,on the death of the first spouse, the survivor merelyretained what she already had. They argued that atransfer of property therefore did not occur on the dateof death and that the estate tax, as applied to thissituation, constituted an unconstitutional direct taxwithout apportionment. 281 U.S. at 500. The Courtrejected this argument and explained in detail why the“amiable fiction of the common law [that] husband andwife are but one person” is not binding for purposes offederal tax legislation (id. at 503):

10 In Irvine, the Court emphasized that “the general and

longstanding rule in federal tax cases [is] that although state lawcreates legal interests and rights in property, federal law deter-mines whether and to what extent those interests will be taxed.”511 U.S. at 238. Because federal law controls the determination ofwhat state-created interests constitute “property” within themeaning of federal tax statutes, “state property transfer rules donot translate into federal taxation rules.” Id. at 239.

11 Section 2040(b) of the Internal Revenue Code currently in-cludes only one-half of the value of such property in the decedent’sgross estate. 26 U.S.C. 2040(b).

24

According to the amiable fiction of the commonlaw, * * * husband and wife are but one person.* * * This view, when applied to a taxing act,seems quite unsubstantial. The power of taxation isa fundamental and imperious necessity of all gov-ernment, not to be restricted by mere legal fictions.Whether that power has been properly exercised inthe present instance must be determined by theactual results brought about by the death, ratherthan by a consideration of the artificial rules whichdelimit the title, rights, and powers of tenants bythe entirety at common law.

Federal tax law thus looks to “the actual results”rather than merely to “the artificial rules” of state lawin determining the nature and taxability of the rightspossessed by tenants by the entirety. 281 U.S. at 503.In Tyler, because the death of the first spouse resultedin an expansion of the survivor’s “actual” propertyrights, the Court upheld the constitutionality of theestate tax on the entire value of the entirety property.Id. at 504.12

Although the precise question at issue here was notpresented in United States v. Rodgers, 461 U.S. at 703n.31, the Court there stated that it was not convinced ofthe correctness of appellate decisions that, prior to thatdate, had concluded that the federal tax lien would notattach to a taxpayer’s interest in a tenancy by the

12 In explaining the reasoning of Tyler in United States v.

Jacobs, 306 U.S. 363 (1939), the Court emphasized that “[t]he con-stitutionality of an exercise of the taxing power of Congress is notto be determined by such * * * ancient fictions” as the ownershipof entirety property by the marital unit. Id. at 369.

25

entirety.13 Noting that these older cases had rested on“the peculiar legal fiction governing tenancies by theentirety in some States,” the Court emphatically ques-tioned “if the tenancy by the entirety cases are cor-rect.” Ibid. (emphasis in original). As one commentatorhas observed, the reasoning of the older cases thatrelied on the state legal fiction of the “marital unit”“was dubious before” and “[n]ow, after Drye, its incor-rectness is glaringly clear.” S. Johnson, After Drye:The Likely Attachment of the Federal Tax Lien toTenancy-by-the-Entireties Interests, 75 Ind. L.J. 1163,1189-1190 (2000).14

C. The Holding Of The Court Of Appeals Would

Create Irrationally Disparate Treatment Of

Similarly Situated Taxpayers And Would Facili-

tate Fraud On The Revenue

1. This Court has emphasized the importance in anational tax system of avoiding “inequalities in the

13 The cases cited by the Court in Rodgers are United States v.

National Bank, 255 F.2d 504, 507 (5th Cir. 1958), cert. denied, 358U.S. 835 (1958), and United States v. Hutcherson, 188 F.2d 326, 331(8th Cir. 1951). The Eighth Circuit recently distinguished its deci-sion in Hutcherson in Cox v. Commissioner, 121 F.2d 390, 392(1997).

14 Even before Drye, commentators had concluded that thereasoning of United States v. Rodgers, supra, and United States v.National Bank of Commerce, supra, required the conclusion that atenancy by the entirety is subject to the federal tax lien. See S.Johnson, Fog, Fairness, and the Federal Fisc: Tenancy-by-the-Entireties Interests and the Federal Tax Lien, 60 Mo. L. Rev. 839,871 (1995); Comment, United States v. National Bank of Com-merce: Co-Owners Suffer the “Federal Law Consequences,” 11 Del.J. Corp. L. 561, 583 (1986); Comment, Federal Tax Liens and StateHomestead Exemptions: The Aftermath of United States v.Rodgers, 34 Buff. L. Rev. 297, 323 (1985).

26

administration of the revenue laws” and of ensuringthat taxpayers do not receive “treatment different fromthat given to other taxpayers of the same class.”Commissioner v. Sunnen, 333 U.S. 591, 599 (1948). TheNation’s tax laws are therefore to be interpreted andapplied to “ensure as far as possible that similarlysituated taxpayers pay the same tax.” Thor Power ToolCo. v. Commissioner, 439 U.S. 522, 544 (1979).

The decision of the court of appeals disserves thatprinciple. The tenancy by the entirety is a form ofproperty ownership that exists in 24 States, the VirginIslands and the District of Columbia.15 Of all the formsof joint property ownership, the tenancy by the en-tirety is the only form that has been treated as exemptfrom the federal tax lien. Every other type of jointly-owned property has consistently been held subject tothe federal tax lien. See, e.g., United States v. Rodgers,461 U.S. at 690-691 (homestead property); UnitedStates v. Davenport, 106 F.3d 1333, 1337 (7th Cir. 1997)(joint tenancy); United States v. Kocher, 468 F.2d 503,507 (2d Cir. 1972), cert. denied, 411 U.S. 931 (1973)(tenancy in common); United States v. Overman, 424F.2d 1142, 1145 (9th Cir. 1970) (community property);

15 These States are Alaska, Arkansas, Delaware, Florida, Ha-

waii, Illinois, Indiana, Kentucky, Maryland, Massachusetts, Michi-gan, Missouri, Mississippi, New Jersey, New York, North Caro-lina, Oklahoma, Oregon, Pennsylvania, Rhode Island, Tennessee,Vermont, Virginia, and Wyoming. See R. Heaton, Administrationof Entireties Property in Bankruptcy, 60 Ind. L.J. 305, 309-310n.24 (1985); 735 Ill. Comp. Stat. Ann. 5/12-112 (West 1993 & Supp.2000). In addition, between 1972 and 1985, a tenancy by the en-tirety could be created in Ohio, and an entirety interest createdduring that period is still treated as valid. Ohio Rev. Code Ann.§§ 5302.17-5302.21 (Anderson 1989 & Supp. 2000); see In re Cline,164 B.R. 592, 593-594 (Bankr. S.D. Ohio 1994).

27

Washington v. United States, 402 F.2d 3, 7 (4th Cir.1968), cert. denied, 402 U.S. 978 (1971) (property sub-ject to dower interest). Under the decision in this case,a taxpayer who owns property in a tenancy by theentirety is thus treated more favorably than a taxpayerwho owns property in the 26 States that do notrecognize, or have abolished, that form of ownership.16

There is no adequate basis in the text or the purposeof the federal tax lien statute for this difference intreatment. To the contrary, as this Court has stated,there is a “sufficient substantial similarity betweenjoint tenancies and tenancies by the entirety to havemoved Congress to treat them alike for purposes oftaxation.” United States v. Jacobs, 306 U.S. 363, 370(1939). In all other respects, these two forms ofownership have consistently received equal treatmentunder the revenue laws (ibid. (emphasis added)).

A tenancy by the entirety “is essentially a jointtenancy, modified by the common law theory thathusband and wife are one person.” Only a fictionstands between the two. Survivorship is the predomi-nant and distinguishing feature of each.

Even within the group of States that recognize ten-ancies by the entirety, the decision in this case produces

16 As part of the progressive recognition of women’s property

rights during the Nineteenth Century (under what were generallyknown as the Married Women’s Property Acts), several westernStates never chose to adopt the tenancy by the entirety andseveral other States elected to abolish or restrict that form ofownership. S. Johnson, supra, 60 Mo. L. Rev. at 843. See, e.g.,Kerner v. McDonald, 60 Neb. 663, 84 N.W. 92 (1900). In England,where the tenancy by the entirety originated, that form of owner-ship was abolished in 1925. S. Johnson, supra, 60 Mo. L. Rev. at843.

28

inconsistent treatment. Under the decision below,taxpayers who own entirety property in the Stateswhere creditors can attach such property for a debtowed by one spouse are treated less favorably thantaxpayers who own such property in the States wherecreditors can attach such property only for a debt owedby both spouses.17 See, e.g., Geiselman v. United States,

17 Fourteen States (and the Virgin Islands and the District of

Columbia) prohibit creditors from attaching entirety property forthe debts of only one spouse: Delaware, Florida, Hawaii, Illinois,Indiana, Maryland, Michigan, Missouri, North Carolina, Penn-sylvania, Rhode Island, Virginia, Vermont and Wyoming. SeeMitchell v. Wilmington Trust Co., 449 A.2d 1055, 1057-1058 (Del.Ch. 1982), aff ’ d, 461 A.2d 696 (Del. Super. Ct. 1983); Finley v.Thomas, 691 A.2d 1163, 1166 (D.C. 1997); Sitomer v. Orlan, 660 So.2d 1111, 1114 (Fla. Dist. Ct. App. 1995); Sawada v. Endo, 57 Haw.608, 617, 561 P.2d 1291, 1297 (1977); 735 Ill. Comp. Stat. 5/12-112(West 1993 & Supp. 2000); Diss v. Agri Bus. Int’l, Inc., 670 N.E.2d97, 99 (Ind. Ct. App. 1996); State v. One 1984 Toyota Truck, 311Md. 171, 187, 533 A.2d 659, 667 (1987); SNB Bank & Trust v.Kensey, 145 Mich. App. 765, 775-777, 378 N.W.2d 594, 599 (1985);In re Van Der Heide, 164 F.3d 1183, 1184 (8th Cir. 1999) (Missourilaw); Dealer Supply Co. v. Greene, 108 N.C. App. 31, 34, 422 S.E.2d350, 352 (1992), review denied, 333 N.C. 343, 426 S.E.2d 704 (1993);Koffman v. Smith, 453 Pa. Super. 15, 27, 682 A.2d 1282, 1288(1996); Bloomfield v. Brown, 67 R.I. 452, 25 A.2d 354 (1942);Masonry Prods., Inc. v. Tees, 280 F. Supp. 654, 657 (D.V.I. 1968);Rogers v. Rogers, 257 Va. 323, 326, 512 S.E.2d 821, 822 (Va. 1999);Lowell v. Lowell, 138 Vt. 514, 516, 419 A.2d 321, 322 (1980);Colorado Nat’l Bank v. Miles, 711 P.2d 390, 393-394 (Wyo. 1985).Nine of the States that recognize the tenancy by the entirety,however, permit creditors to attach one spouse’s interest in suchproperty for the debts of only that spouse, subject to the rights ofthe nondebtor spouse: Alaska, Arkansas, Kentucky, Massachu-setts, New Jersey, New York, Oklahoma, Oregon, Rhode Island,and Tennessee. See Alaska Stat. § 09.38.100(a) (Michie 2001);Morris v. Solesbee, 48 Ark. App. 123, 128, 892 S.W.2d 281, 283(1995); Hoffman v. Newell, 60 S.W.2d 607, 613 (Ky. 1932); In re

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961 F.2d 1, 7 (1st Cir.), cert. denied, 506 U.S. 891 (1992)(husband’s interest in entirety property is subject tothe federal tax lien because Massachusetts law permitscreditors to attach his interest in the property); UnitedStates v. Diemer, 859 F. Supp. 126, 131 (D.N.J. 1994),rev’d on other grounds sub nom. United States v. Avila,88 F.3d 229 (3d Cir. 1996) (same under New Jerseylaw); United States v. Brynes, 848 F. Supp. 1096, 1099(D.R.I. 1994) (same under Rhode Island law); UnitedStates v. Ragsdale, 206 F. Supp. 613 (W.D. Tenn. 1962)(same under Tennessee law).

The arbitrary inequality of treatment that resultsunder the rationale of the court of appeals is magnifiedby the fact that entirety ownership is not limited to realestate. At least fifteen jurisdictions also allow personalproperty—such as automobiles, stocks, bonds and bankaccounts—to be owned in a tenancy by the entirety.18

Snyder, 231 B.R. 437, 442 (Bankr. D. Mass. 1999); United States v.Jones, 877 F. Supp. 907, 916-920 (D.N.J. 1995), aff ’d mem., 74 F.3d1228 (3d Cir. 1995); BNY Fin. Corp. v. Moran, 154 Misc. 2d 435,436, 584 N.Y.S.2d 261, 262 (Sup. Ct. 1992); Okla. Stat. Ann. tit. 60, §74 (West 1994); Wilde v. Mounts, 95 Or. App. 522, 524-525, 769 P.2d802, 803-804 (1989); Arango v. Third Nat’l Bank of Nashville, 992F.2d 611, 613 (6th Cir. 1993) (Tennessee law). The rule in Missis-sippi is uncertain. See Cuevas v. Cuevas, 191 So. 2d 843 (Miss.1966).

18 These jurisdictions are: Alaska, Arkansas, Delaware, theDistrict of Columbia, Florida, Hawaii, Kentucky, Maryland, Mas-sachusetts, Missouri, Oklahoma, Pennsylvania, Tennessee, Ver-mont, and Virginia. See Faulk v. Estate of Haskins, 714 P.2d 354(Alaska 1986); Boggs v. Boggs, 26 Ark. App. 188, 190, 761 S.W.2d956, 957 (1988); Ciconte v. Barba, 161 A. 925 (Del. Ch. 1932); In reEstate of Wall, 440 F.2d 215, 219 (D.C. Cir. 1971); Beal Bank, SSBv. Almand & Assoc., Inc. 780 So. 2d 45, 53-54 (Fla. 2001); TradersTravel Int’l Inc. v. Howser, 69 Haw. 609, 613, 753 P.2d 244, 246(1988); Ky. Rev. Stat. Ann. § 140.050 (Michie 1991); State v. One1984 Toyota Truck, 69 Md. App. 235, 237-238, 517 A.2d 103, 104

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Several other States allow some, but not all, types ofpersonal property to be owned in a tenancy by theentirety.19 And one jurisdiction that extends a tenancyby the entirety to personal property has recentlyexpanded the protections of ownership in tenancy bythe entirety to members of the same sex who form a“civil union.” See Vt. Stat. Ann. tit. 15, §§ 1202(2),1204(e)(1).

2. The decision in this case not only produces incon-sistent treatment of similarly situated taxpayers, it alsoprovides significant opportunities for obstructing andavoiding the collection of taxes. Under the reasoning ofthe decision below, both spouses may earn income, failto file returns or file only separate returns,20 place their (1986), aff ’d, 311 Md. 171, 533 A.2d 659 (1987); Woodard v.Woodard, 216 Mass. 1, 2, 102 N.E. 921 (1913); Hallmark v.Stillings, 648 S.W.2d 230, 233 (Mo. Ct. App. 1983); 60 Okla. Stat.Ann. § 74 (West 1994); Madden v. Gosztonyi Sav. & Tr. Co., 331Pa. 476, 483, 200 A. 624, 628 (1938); White v. Watson, 571 S.W.2d493, 495 (Tenn. Ct. App. 1978); Beacon Milling Co. v. Larose, 138Vt. 457, 461, 418 A.2d 32, 33 (1980); Oliver v. Givens, 204 Va. 123,126, 129 S.E.2d 661, 663 (1963).

19 For example, Michigan allows bonds, stocks, mortgages, pro-missory notes, debentures, and other financial assets to be held ina tenancy by the entirety. DeYoung v. Mesler, 373 Mich. 499, 505,130 N.W.2d 38, 41 (1964) (dissenting opinion). In Michigan andIndiana, personalty derived from real estate (such as crops) andthe proceeds of the sale of real estate may be owned in tenancy bythe entirety when the underlying real estate was itself held in thatform of ownership. See ibid.; Koehring v. Bowman, 194 Ind. 433,142 N.E. 117, 118 (1924).

20 Married taxpayers become jointly and severally liable fortaxes when they elect to file joint returns. See 26 U.S.C.6013(d)(3). Since, if they file a joint return, both spouses are liablefor the resulting taxes, property held in a tenancy by the entiretycould then be seized for collection. See Pet. App. 52a; W. Plumb,supra, at 37. The tax avoidance scheme sanctioned by the court of

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assets—such as real property, stocks, bonds and bankaccounts—in a tenancy by the entirety, and claim anexemption of that property from tax collection. Theycould then use that “exempt” property to earn income,to pay debts to third parties or to make gifts to familymembers free and clear of any lien or liability for taxes.It is difficult to conceive of a more simple or widelyavailable method of evading the collection of taxes. AsJudge Ryan emphasized in his separate opinion in thiscase, the majority opinion “not only contravenesestablished precedent, but provides an avenue for easyavoidance of federal income-tax laws.” Pet. App. 69a.

The ready pathway for tax avoidance permittedunder the decision below is illustrated by the pendingcase of Hatchett v. IRS, 126 F. Supp. 2d 1038 (E.D.Mich. 2000), appeal docketed, No. 00-1645 (6th Cir. June13, 2000). That case involves a lawyer who accruedfederal tax debts exceeding $8,000,000 for 1975 through1991. Instead of paying these taxes, the lawyer usedhis untaxed income to accumulate equity in four valu-able parcels of real estate that he placed in a tenancy bythe entirety. The district court concluded that thefederal tax liens did not attach to these propertiesunder the reasoning applied by the court of appeals inthis case. 126 F. Supp. 2d at 1050-1051.

It is implausible to conclude that, in enacting thebroad text of the federal tax lien statute, Congressintended to authorize such facile and transparentschemes to avoid tax collection. Instead, as this Courthas emphasized, in drafting this lien provision,“[s]tronger language could hardly have been selected toreveal a purpose to assure the collection of taxes.”

appeals in this case thus operates only when married taxpayers fileno returns or file separate, rather than joint, returns.

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Glass City Bank v. United States, 326 U.S. at 267. Thedecision of the court of appeals has thus, in short, “leftus with a rule which compromises the revenue, createsa ready pathway for tax avoidance, defeats equal treat-ment of taxpayers, and lacks any defensible doctrinalunderpinning.” S. Johnson, supra, 60 Mo. L. Rev. at888. See also Note, Property Subject to the Federal TaxLien, 77 Harv. L. Rev. at 1498.

CONCLUSION

The judgment of the court of appeals should be re-versed, and the case should be remanded to that courtfor further proceedings consistent with this Court’sopinion.

Respectfully submitted.

THEODORE B. OLSONSolicitor General

EILEEN J. O’CONNORAssistant Attorney General

LAWRENCE G. WALLACEDeputy Solicitor General

KENT L. JONESAssistant to the Solicitor

GeneralDAVID ENGLISH CARMACKJOAN I. OPPENHEIMER

Attorneys

NOVEMBER 2001